PART VII

ACCOUNTING PRINCIPLESGenerally accepted accounting principles, also called Strongly independent and consisting of accountingconcepts and standards, are needed to assure accounting professionals from public, governmental, industrial, andinformation is reliable, understandable, and comparable. educational sectors, FASB has issued many StatementsOfficial sources for these principles began with the of Financial Accounting Standards. A third authority,American Institute of Certified Public Accounts the Securities and Exchange Commission (SEC), works(AICPA), whose Accounting Principles Board issued 31 closely with the F ASB. Both official standards andformal opinions. AICPA has been replaced by the practices generally followed by the profession areFinancial Accounting Standards Board (FASB). summarized by this Leaming Unit.Our 28 Free Internet Libraries have free academic and career materials for students, teachers, and professional.

ACCOUNTING ENTITY CONCEPT An economic unit, which may be a person, business, government, organization, or part thereof, is being accounted for.

GOING CONCERN CONCEPT Until reasonable facts indicate otherwise, it is assumed that the accounting entity will exist long enough to use assets and fulfill commitments. Liquidation value may be ignored.

TIME PERIOD CONCEPT To be useful, accounting information must be current and presented in equal, understandable time units called accounting periods.

COST PRINCIPLE Income Statement and Balance Sheet accounts must be recorded at cost, as evidenced by their objective fair market value at time of acquisition. Called historical costs, these figures, to the dismay of some, are generally not adjusted to current market value.

REALIZATION PRINCIPLE With accrual accounting, revenue is recorded when earned, and costs are recorded when incurred. For a retailing business, point of sale easily establishes when earned, for manufacturing and construction businesses, the process is more complicated.

THE MATCHING PRINCIPLE When determining income, expenses must be matched with the revenue they generate.

OBJECTIVITY PRINCIPLE To be reliable, accounting information must be objective. Objectivity requires

MATERIALITY Accounting principles need not be followed when the effect of this action is immaterial and would not effect the reader's interpretation of the accounting information.

FULL DISCLOSURE All relevant material facts must be incorporated into financial statements. Some information, such as a contingent liability, is easily communicated with a footnote, while other information, such as the effect of inflation, requires more complex procedures.

CONSISTENCY Accounting methods used to determine income and value balance sheet items must be consistently applied.